ACC 450 Chapter 10

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees?

A bank lockbox system

Bank cut-off statement

A bank statement for the first 7-10 business days following the end of the client's fiscal year

Compensating balance

A cash balance maintained as part of a debt agreement

Zhang Inc. left the sales journal open after year-end for an extra day and included Jan 1 sales in Dec 31 totals. The company uses a periodic inventory system. What effect would this have on fiscal year?

A/R - Overstated Sales - Overstated Income - Overstated

Zhang Inc. left the sales journal open after year-end for an extra day and included Jan 1 sales in Dec 31 totals. The company uses a perpetual inventory system. What effect would this have on fiscal year?

A/R - Overstated Sales - Overstated Income - Overstated COGS - Overstated Inventory - Understated

Zhang Inc. closed the sales journal at 12/29 and reported the two last days' sales in January of the next year. The company uses a perpetual inventory system. What effect would this have on fiscal year?

A/R - Understated Inventory - Overstated COGS - Understated Sales - Understated Income - Understated

Internal control over cash disbursements is best acheived when:

All payments are made by check or well-controlled electronic funds transfer

A client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

Sales

Zhang Inc. left cash receipts journal open after yearend for an extra day and included Jan 1 cash receipts in Dec 31 totals. The company uses periodic inventory system. What effect would this have on fiscal year?

Cash - Overstated A/R - Understated

Zhang Inc. left both the sales journal and the cash receipts journal open through Jan 2 and reported the first two days' transactions in December. The company uses a periodic inventory system. What effect would this have on fiscal year?

Cash - Overstated A/R - Understated by cash amount, Overstated by sales amount Sales - Overstated Income - Overstated

Zhang Inc. closed cash receipts journal at Dec 29 and reported the last two days of cash receipts in January of the next year. The company uses period inventory system. What effect would this have on fiscal year?

Cash - Understated A/R - Overstated

Why is more audit time devoted to the audit than is indicated by its dollar amount?

Cash generally has a high degree of inherent risk

Why are newly hired auditors often assigned to audit cash?

Cash is typically considered a lower-risk audit area

Check Clearing for the 21st Century Act

Checks may be processed electronically

What is a primary substantive procedure for cash:

Confirmation of the balances of the company's accounts with F/S

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to:

Coordinate the count of cash with the count of marketable securities and other negotiable assets

Assume customers are saying they owe a smaller amount than that on the confirmation. This is consistent with:

Sales journal held open after year-end; cash receipts journal closed prior to year-end

Journal entry for credit sale-periodic inventory system

DB A/R CR Sales

Journal entry for credit sale-perpetual inventory system

DB A/R CR Sales DB COGS CR Inventory

Journal entry for cash receipt on an account receivable

DB Cash CR A/R

Journal entry: Establish payroll bank account with $100 in it

DB Cash-Payroll $100 CR Cash-General $100

Journal entry: Pay the payroll of $9,000

DB Cash-Payroll $9,000 CR Cash-General $9,000 DB Payroll Expense $9,000 CR Cash-Payroll $9,000

Journal entry: Establish a petty cash fund with $50 in it

DB Petty Cash $50 CR Cash-General $50

Journal entry: Petty cash is replenished

DB Supplies Expense $7 DB Postage Expense $8.25 CR Cash-General $15.25

What strengthens the internal control over cash sales?

Dual control, use of cash registers of POS systems

Do confirmations get at existence or completeness more?

Existence

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

General ledger

Where do we find balance per books?

General ledger

Types of cash accounts:

General, savings, imprest, compensating balance

Your client kept the cash receipts journal open after year-end and included January 1 and 2 cash receipts in December 2011 totals. All of the those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/xx count of the physical inventory, which of the following is most likely to be true relating to the 2011 financial statements (the audit year)?

Income is overstated

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks

Fraud involving cash is generally:

Missappropriation

Journal entry: Pay Jones $7 for supplies he purchased for company

No entry because petty cash always stays on books at $50--$43 in cash, $7 in cash receipts

Journal entry: Pay Smith $8.25 for postage she paid for the company

No entry--$8.25 is given and a receipt for the amount is signed

Journal entry: Individual cashes payroll check

No journal entry--balance in payroll account remains the same unless individual changes amount on check

Journal entry: Month-end reconciliation

No journal entry--the reconciliation should reconcile from the bank's balance ($100 + any uncashed checks) to the $100 on the books. The difference would be the unchashed checks

Substantive test: Obtain analyses of cash balances and reconcile them to GL

Objective: Clerical accuracy

Substantive test: Analyze bank transfers occurring around year-end

Objective: Completeness

Substantive test: Count cash on hand

Objective: Existence/Rights

Substantive test: Obtain reconciliations of bank balances and consider reconciling bank activity

Objective: Existence/Rights

Substantive test: Send standard confirms to financial institutions

Objective: Existence/Rights

Substantive test: Verify the client's cutoff of cash transactions

Objective: Existence/Rights/Completeness/Cutoff

Substantive test: Obtain bank cutoff statement

Objective: Existence/Rights/Cutoff

Substantive test: Evaluate financial statement presentation and disclosure

Objective: Presentation and disclosure

Substantive test: Investigate payments to related parties

Objective: Presentation and disclosure

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes

Imprest account

Petty cash, payroll--the balance is maintained in the F/S as a fixed amount

How should securities be inspected?

Physically and periodically

Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements

What do CPA Firms use as a fraude detection technique?

Proof of Cash

Internal control guidelines for cash:

Segregation of duties, centralize receiving of cash, separate cash handling from record keeping, deposit cash receipts daily, record cash receipts on a timely basis, prepare monthly bank recs, forecast expecte cash receipts and disbursements

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Shipping documents file

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:

Stamped "paid" by the check signer

Who should perpare the paper confirm? Who should send it?

The client; the auditor

What is the primary objective of preparing a bank transfer schedule?

To detect kiting

What is the primary objective of searching for large checks to directors, officers, and employees?

To identify related party transactions

What is the primary objective of preparing a four-column proof of cash?

To reconcile cash receipt and disbursement totals between company records and bank records

What is the primary objective of obtaining bank cutoff statements?

To verify reconciling items on the year-end bank reconciliation

What is the primary objective of using a standard confirmation form to confirm account balance information?

To verify year-end cash and liability balance information

Kiting

Using the "float period" to count the cash in two or more accounts